Small-cap funds can deliver some of the highest long-term returns in Indian equity, but they have also lost 50–75% in past crashes. Five established funds worth shortlisting are Nippon India Small Cap, SBI Small Cap, Axis Small Cap, HDFC Small Cap and Kotak Small Cap. Each has more than ten years of history and a record that holds up across several measures. None of this is a recommendation to buy.
Below we compare these funds on returns, worst-case periods, crash losses, cost and size. We also cover the investment limits some AMCs have placed on small-cap funds, what happened in 2008 and 2018–20, how much of a portfolio to allocate, tax, direct vs regular plans, and when to exit.
What a small-cap fund holds
SEBI defines small caps as companies ranked 251st and below by full market capitalisation. A small-cap fund must keep at least 65% of its money in them. These are younger or niche businesses, often with thin trading volumes, so prices can swing sharply and a large fund can struggle to sell holdings quickly in a panic. If you want to understand the kinds of companies involved, see our look at small-cap manufacturing stocks.
How we picked the funds
We started with SEBI small-cap category funds that have at least ten years of direct-plan history. We then compared 3-, 5- and 10-year returns, every 5-year rolling period since each direct plan began, the fall from peak in 2018–20 and in 2024–25, the expense ratio and the asset base. Funds that topped one period but collapsed in another, such as Quant Small Cap (worst 5-year rolling return of -6.4% a year), were left out. All return figures are for direct plans and were calculated from AMFI’s daily NAV data up to 31 August 2026. Nippon India’s own published 3- and 5-year figures match ours.
Small-cap funds worth shortlisting: comparison
Returns are direct-plan CAGR as of 31 August 2026 (AMFI NAV data). TER is the total direct-plan expense ratio for August 2026 (AMFI). AUM is the April–June 2026 average (AMFI), rounded.
| Fund (direct, growth) | Launched | 3Y CAGR | 5Y CAGR | 10Y CAGR | Worst 5Y rolling | Fall 2018–20 | Fall 2024–25 | TER | AUM (₹ cr) |
|---|---|---|---|---|---|---|---|---|---|
| Nippon India Small Cap | Sep 2010 | 16.3% | 20.1% | 21.5% | 4.0% | -48.6% | -24.2% | 0.69% | 73,159 |
| SBI Small Cap | Sep 2009 | 13.1% | 15.6% | 19.1% | 8.4% | -40.3% | -22.4% | 0.78% | 37,116 |
| Axis Small Cap | Nov 2013 | 16.7% | 17.3% | 19.5% | 6.0% | -34.6% | -19.4% | 0.73% | 27,535 |
| HDFC Small Cap | 2008 | 11.4% | 16.1% | 17.7% | 1.5% | -48.3% | -22.6% | 0.75% | 38,667 |
| Kotak Small Cap | Feb 2005 | 13.3% | 14.2% | 17.7% | 1.8% | -40.6% | -24.7% | 0.64% | 17,608 |
| Nifty Smallcap 250 index fund (Motilal Oswal, for reference) | 2019 | 15.7% | 15.9% | n.a. | n.a. | n.a. | -26.2% | n.a. | n.a. |
Since August, these five funds have slipped a further 3.7% to 5.5% (31 August to 1 October 2026, AMFI NAV data). The rolling-return column covers different periods for each fund, because direct-plan data starts in 2013 for most and mid-2014 for HDFC.
What each fund brings
- Nippon India Small Cap: the largest fund in the category and the best 10-year return here. Managed by Samir Rachh since January 2017 (Nippon India Mutual Fund). Its size is the main concern, which is why the AMC limits new money (see below).
- SBI Small Cap: the best worst-case 5-year return (8.4% a year) and a smaller fall than most in 2018–20. It has restricted inflows for most of the past decade. Check the latest factsheet for the current fund manager and any limits on fresh investment.
- Axis Small Cap: the smallest falls in both 2018–20 and 2024–25, with returns close to the leaders. Its management team changed in 2024, so the long record was built partly under different people.
- HDFC Small Cap: managed by Chirag Setalvad (HDFC Mutual Fund) and known for a value tilt. Its 3-year return is the weakest of the five, a reminder that style matters: value-leaning funds lag in some phases and lead in others.
- Kotak Small Cap: the oldest scheme here and the lowest TER. It has been managed by Harish Bihani since October 2023 (Kotak Mutual Fund), and its 5-year return trails the index fund.
SIP and lump-sum limits on small-cap funds
Because small caps are hard to buy and sell in bulk, several AMCs have capped new money in their small-cap funds. Some notable cases:
- SBI Small Cap: lump sums were stopped in 2015, briefly reopened on 31 March 2020 with a ₹1,000 crore ceiling, and stopped again from 7 September 2020. From 4 February 2021, new SIP and STP registrations were capped at ₹25,000 a month per PAN (SBI MF factsheet).
- Nippon India Small Cap: limited subscriptions from 7 July 2023, stopping fresh lump sums (Nippon India MF). From 30 March 2026, new SIP and STP registrations are capped at ₹2 lakh per instalment, and total investment at ₹46 lakh per PAN per calendar month (Nippon notice of March 2026, via FundsIndia).
- Others: DSP Small Cap also restricted lump sums until 2020, and Kotak Mutual Fund lifted its small-cap curbs in July 2024.
These limits change, so check the AMC’s latest notice before investing. A cap is not a reason to avoid a fund. It usually means the manager is protecting existing investors from too much money chasing too few stocks. It does mean you may need a SIP rather than a lump sum.
How deep small caps have fallen in past crashes
Small-cap returns come in bursts, separated by long, painful falls. Peak-to-trough NAV falls for regular plans, from AMFI data:
| Fund (regular plan) | 2008 crash (Jan 2008 to Mar 2009) | 2018–20 (Jan 2018 to Mar 2020) |
|---|---|---|
| DSP Small Cap (then DSP BlackRock Micro Cap) | -74.7% | -49.8% |
| Franklin India Small Cap (then Smaller Companies) | -71.4% | -51.1% |
| Nippon India Small Cap | launched 2010 | -49.7% |
| HDFC Small Cap | not a small-cap fund then | -49.5% |
| SBI Small Cap | launched 2009 | -41.8% |
The 2018–20 fall was especially hard because it lasted more than two years before Covid finished it off. Worked example (hypothetical, using actual NAVs): suppose Priya started a ₹10,000 monthly SIP in Nippon India Small Cap’s direct plan in January 2018. By 24 March 2020 she had invested 27 × ₹10,000 = ₹2.7 lakh, and it was worth about ₹1.69 lakh, a loss of about ₹1.01 lakh or 37.5%. Had she kept going until December 2021, ₹4.8 lakh invested would have been worth about ₹9.79 lakh. The investors who did well were the ones who didn’t stop. Our explainer on stock market crashes puts these falls in context.
Who should and shouldn’t invest
Small-cap funds suit investors with a horizon of 8–10 years, an existing core of large-cap, flexi-cap or index funds, and steady income so they never have to sell in a slump. They are not suitable for money needed within 5–7 years, for a first equity fund, or for anyone who would lose sleep watching a 40% paper loss. If you want small-cap exposure without picking a manager, a Nifty Smallcap 250 index fund is a cheaper, simpler option.
How much of your portfolio to allocate
We’d suggest up to 5–10% of your equity holdings if you are cautious, 10–15% if balanced, and no more than about 20–25% even with a high risk appetite. Our guide to asset allocation explains how to set the equity-debt split first.
Worked example: Arjun has ₹20 lakh, with ₹14 lakh in equity. He puts 10% of his equity in a small-cap fund: 10% × ₹14 lakh = ₹1.4 lakh. If small caps fall 50%, he loses ₹70,000, which is ₹70,000 ÷ ₹20 lakh = 3.5% of his total portfolio. Had he put 40% of his equity (₹5.6 lakh) in small caps, the same fall would cost ₹2.8 lakh, or 14% of everything he owns.
Tax on small-cap fund gains
Small-cap funds are taxed as equity funds. Rules in force since 23 July 2024, unchanged by Budget 2026:
- Held 12 months or less: short-term gains taxed at 20%.
- Held more than 12 months: long-term gains above ₹1.25 lakh a year, across all equity holdings, taxed at 12.5%.
- IDCW payouts: taxed at your slab rate.
Example of an early exit: Rahul invests ₹2.6 lakh and redeems after 8 months at ₹3 lakh. His gain is ₹40,000. Short-term tax = 20% × ₹40,000 = ₹8,000, plus 4% cess (₹320) = ₹8,320. Most small-cap funds, including Nippon India, HDFC and SBI Small Cap, also charge a 1% exit load within a year: 1% × ₹3 lakh = ₹3,000. Selling early cost him ₹11,320, more than a quarter of his gain. The guide on cutting capital gains tax explains how to use the yearly ₹1.25 lakh exemption.
Direct vs regular plans
The direct plan has no distributor commission, so it costs less. In August 2026, Nippon India Small Cap’s TER was 0.69% for the direct plan and 1.41% for the regular plan (AMFI). ₹5 lakh invested on 31 August 2016 would have grown to about ₹35.03 lakh in the direct plan and about ₹31.95 lakh in the regular plan by 31 August 2026, a gap of roughly ₹3.08 lakh (AMFI NAV data). If you pay for advice, a regular plan or a fee-only adviser can be worth it, but know the cost. You can model the long-run effect with our lump sum calculator.
How to monitor, and when to exit
- Judge over 3–5 years against the benchmark (Nifty Smallcap 250 TRI or BSE 250 SmallCap TRI), not month to month.
- Read the monthly stress test. Since 2024, AMCs disclose how many days it would take to sell 25% and 50% of a small-cap portfolio. A sharp rise is a liquidity warning.
- Note manager changes and sudden AUM jumps. Both can change how the fund behaves.
- Rebalance once a year. If small caps rise from 10% to 18% of your equity, book some gains (ideally within the ₹1.25 lakh exemption) and move them to your core funds.
- Exit gradually near your goal. Start moving money to debt 3–4 years before you need it, through an STP, so one crash can’t wipe out the corpus.
Common mistakes
- Buying after a year of 50%+ returns and selling in the next fall.
- Holding three small-cap funds that own many of the same stocks.
- Ignoring investment limits and setting up a SIP the AMC will reject.
- Treating small-cap funds like individual small stocks. Funds are diversified; penny stocks are a different, far riskier game.
FAQ
Which small cap fund is best for SIP?
Funds with long, consistent records, such as Nippon India, SBI, Axis, HDFC and Kotak Small Cap, are reasonable starting points. Check each one’s current SIP limits, TER and 5-year rolling returns, and pick one or two rather than all five.
Why do some small cap funds not accept lump sum investments?
Small-cap stocks trade in low volumes, so large inflows can force a manager to overpay or hold excess cash. AMCs such as SBI and Nippon India have at times paused lump sums or capped SIPs to protect existing investors.
How much can a small cap fund fall?
History says a lot. Small-cap funds lost roughly 70–75% in the 2008 crash, around 40–50% between January 2018 and March 2020, and about 19–26% in the 2024–25 correction.
Is it a good time to invest in small cap funds?
Nobody can time small caps reliably. A SIP over at least 8–10 years, kept to a modest share of your portfolio, removes the need to guess.
Small cap fund or small cap index fund?
Index funds are cheaper and avoid manager risk. Over the five years to August 2026, the Motilal Oswal Nifty Smallcap 250 index fund returned 15.9% a year. Three of the five active funds here did better, two did not.
Sources
- AMFI daily NAV file (historical NAVs used for returns and drawdowns)
- AMFI: Total expense ratio of mutual fund schemes
Ramesh Iyer is the pen name of the founder and editor of StocksInfo.AI, an independent investor in Indian equities, mutual funds and ETFs since 2020. Every article is researched from primary sources such as SEBI, AMFI, NSE and the Income Tax Department, and fact-checked before publishing. About us